New York Markets After Hours

Piping profits

Commentary: Crumbling infrastructure creates opportunity

By

KevinKerr

NEW YORK (MarketWatch) -- The news that British oil company BP Plc. "suddenly" has a disaster on its hands with the Alaska pipeline comes as no real surprise to many experts. It's pretty basic; if you neglect anything long enough, it simply falls apart.

One need only look at my 1996 Jeep Cherokee to see what years of use and minimal care will yield. You reap what you sow. The BP
BP, -1.83%
pipeline is just the beginning of the coming infrastructure meltdown -- and that offers investors ways to profit big from inevitable and vast repairs in so many sectors.

Paying the piper

Fixing stuff costs money. It's as simple as that. I called a plumber recently to come out and do some work on my house and once I was lucky enough to be graced by his presence, the bill was out site. Imagine some of these big companies and the infrastructure costs they face and how hard it will be to find vendors and repair companies to do the work. BP said that costs to replace the pipeline are "hard to pin down." I think the technical term is "a lot."

Portfolio fixer-upper

In the U.S. there are over 53,000 water systems. Most of these are tiny, providing water to less than 4,000 homes. This is where the real problems are, in the smaller systems, they are poorly maintained and inefficient.

Some estimates predict that we lose 60 billion gallons of water every day through old, leaky pipes and mains. That dripping faucet in your kitchen may not seem that bad but 60 billion gallons is enough water for the entire state of California. There are lots of stories about breakdowns in aging pipes leading to interruption of service -- or worse, leading to dangerous contaminants in the water itself.

According to the Environmental Protection Agency, U.S. water systems need hundreds of billions of dollars in upgrades and repairs. The agency estimates, water is the single largest expenditure in our entire economy. That means that it falls just "behind only defense spending and Social Security," according to Chris Mayer, a good friend and also the Editor of Capital and Crisis and Mayer's Special Situations (both excellent industry publications where Chris has written about all of this). In fact last week I had the pleasure of speaking in Vancouver with Chris Mayer and had a chance to discuss this very topic with him. We agree that there are many water stocks out there but Chris clued me into a few real gems.

Wading in for profits

So what stocks are good picks for these sectors, it's a great question and not always easy to narrow down.

As I sat with Chris, he reminded me that one of the keys to rebuilding worldwide infrastructure will be replacing those many miles of pipeline. But there's more.

"See, the water in the pipes doesn't move by itself... it needs huge pumps to keep it flowing. Some of these pumps are so powerful, they move water as fast as 40,000 gallons a minute," Chris explained. "Without these pumps, you'd barely get a trickle from your showerhead. Your hose wouldn't spray enough to water your garden. Your kitchen tap would do nothing but drip, even all the way open. Your toilet would never refill. These mega-pumps are the true 'beating heart' of the water-delivery network."

Some of the water infrastructure stocks that we viewed favorably included Northwest Pipe
NWPX, -1.54%
SJW Corp.
SJW, -0.13%
and PICO Holdings
PICO, -1.40%
but the company that really caught my eye was the Gorman-Rupp Company
GRC, -2.44%

The very diversified Gorman-Rupp, a company that I've know about for some time, is a good bet on the coming repair cycle. Beyond water pumps, GRC also manufactures pumps for municipal, sewage, industrial, mining, construction, petroleum, OEM, government, agriculture and fire markets. The company has a wide range of pump models that include things like self-priming centrifugal pumps to lightweight IPT pumps -- even complete packaged pump stations.

GRC is the one stop shop for pumping needs.

So if the rest of the market has got you down, investing in infrastructure repair may help prop up an otherwise crumbling portfolio.

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